Not knowing you are a franchise can put you in the way of litigation

Not knowing you are a franchise can put you in the way of litigation

With Halloween just behind us, it seems like a good time to discuss franchisors in disguise.

Every experienced franchise lawyer has come across incidents of company owners who either did not know or care that they were franchisors and not strict licensors, distributors or another similar disseminator of its products and services. Many of us have dealt with this situation from the perspective of assisting the franchisors in identifying their legal status and complying with applicable laws, as well as from the perspective of aiding franchisees in getting out of franchise agreements on the grounds their franchisor did not treat them as franchisees are legally entitled.

As a starting point, consider what a franchise is. In Ontario, Alberta, Manitoba, Prince Edward Island and New Brunswick franchise legislation essentially defines a franchise as (a) the grant of a right to someone to conduct a business under a trademark, (b) where some form of payment is charged for that right, and (c) the person granting the right exercises a significant amount of control over the other person’s business operations.

The third element, is what sets franchising apart from other methods of distribution, since the degree of control over a franchisee’s business is what facilitates the consistency and uniformity across a chain that is systemic to franchising. It’s also what tends to tangle up a lot of licensors who don’t realize they’ve crossed that line by virtue of providing assistance and support to their licensee, beyond licensing a trademark, charging a fee and moving on.

Franchised businesses in the aforementioned provinces are governed by franchise legislation, whereas (for the most part) there are not really laws in Canada that set out the rights of pure licensees or distributors. As a result, the penalties for a franchisor’s failure to comply with franchise law can be severe, including having to refund the franchisee the full amount of its investment in the business.

For this reason, much litigation has been rooted in licensees alleging they were actually franchisees, and as such were entitled to all of the legal rights and remedies that are afforded to franchisees, including the receipt of a franchise disclosure document.

While the franchise legal landscape in Canada is littered with examples of pitfalls for franchisors and paydays for franchisees when a franchisor simply did not know about or did not bother to comply with its obligations under franchise law, the liability of the inadvertent franchisor who thought it was something else is no less treacherous.

If you are seeking to distribute your goods and services by granting the right to others to do it, make sure you are getting specialized legal advice so you don’t find yourself a franchise in disguise. Likewise, if you are the one acquiring the business, make sure you know your rights when dealing with a non-compliant franchisor.